Papers by Kiyotaka Nakashima
This paper examines two hypotheses regarding how uncertainty affects investment–cash flow sensiti... more This paper examines two hypotheses regarding how uncertainty affects investment–cash flow sensitivity. In this regard, one hypothesis pertains to the cautionary channel through which investment–cash flow sensitivity decreases as uncertainty increases, and the other relates to the financing constraint channel through which the sensitivity increases. This paper evaluates the impact of uncertainty on investment–cash flow sensitivity by using firm-level data on the Japanese manufacturing industry. We demonstrate that the cautionary effect that makes actual corporate investment decisions unresponsive to the firm’s financing conditions becomes dominant under higher uncertainty irrespective of the type of corporate investment—capital investment and research and development (R&D)—and is more pronounced in firms with fewer cash holdings.
This study examines the impact of strengthening bank capital supervision on bank behavior in the ... more This study examines the impact of strengthening bank capital supervision on bank behavior in the incomplete enforcement of regulations. In a dynamic model of banks facing persistent idiosyncratic shocks, banks accumulate regulatory capital and decrease charter value and lending in the short run, while in the long run, the banking system achieves stability. To test the short-run implications, we utilize the introduction of the prompt corrective action program in Japan as a quasi-natural experiment. Using some empirical specifications with bank- and loan-level data, we find empirical evidence consistent with the theoretical predictions. JEL classification: G00, G21, G28.
We examine the reason why two opposing views on distressed banks' lending behavior in Japan's pos... more We examine the reason why two opposing views on distressed banks' lending behavior in Japan's postbubble period have coexisted: one is stagnant lending in a capital crunch and the other is forbearance lending to low-quality borrowers. To this end, we address the measurement problem for bank balance sheet risk. We identify the credit supply and allocation effects of bank capital in the bank loan equation specified at the loan level, thereby finding that the ``parallel worlds'', or the two opposing views, emerge because the regulatory capital does not reflect the actual condition of increased risk on bank balance sheets, while the market value of capital does. By uncovering banks' efforts to increase regulatory capital in Japan's postbubble period, we show that banks with low market capitalization, and which had difficulty in building up adequate equity capital for their risk exposure, decreased the overall supply of credit. Parallel worlds can emerge whenever banks are allowed to overvalue assets at their discretion, as in Japan' postbubble period.
In this paper, we investigate the effects of the negative interest rate policy (NIRP) on bank cre... more In this paper, we investigate the effects of the negative interest rate policy (NIRP) on bank credit offering and the borrowing behavior of firms by using tens of thousands of bank-firm matched data for Japanese listed firms. By utilizing the difference-indifference method, we find that the implementation of the NIRP in February 2016 by the Bank of Japan has a significantly negative impact on loans from banks with larger reserves. Furthermore, the negative interest rate led to heterogeneous credit allocation effects, that is, banks with lower capitalization increased loans to risky firms or firms with lower distance-to-default. In addition, non-financial firms that borrow from banks with high exposure to the negative interest rate decreased their fixed investments. Further, we also provide insight into the unintended effects of the NIRP in terms of profitability channel by demonstrating that a bank's high reliance on deposit funding does not necessarily lead to the existence of a reversal rate, unlike previous studies using European data. JEL classification: E44, E52, G21.
We investigate the effects of unconventional monetary policy on
bank lending, using a bank-firm l... more We investigate the effects of unconventional monetary policy on
bank lending, using a bank-firm loan-level matched dataset from 1999 to 2015 by
extracting exogenous changes in unconventional monetary policies over the past 20
years in Japan. We find that an increase in the share of unconventional assets held by
the Bank of Japan boosts lending to firms with higher credit risks from banks with
lower liquidity ratios and higher risk appetites while an expansion of the monetary
base does not have such effects. Furthermore, we find that interest rate cuts stimulate
lending to risky firms from banks with higher leverage.
Peek and Rosengren (American Economic Review 2005; 95) suggested the mechanism of ``unnatural sel... more Peek and Rosengren (American Economic Review 2005; 95) suggested the mechanism of ``unnatural selection,'' where low-capitalized Japanese banks increase credit to low-quality firms because of their motivation to pursue balance sheet cosmetics. In this study, we replicate their estimation results, using loan-level data from 1994 to 1999, and thereby reexamine this mechanism in terms of the interaction effect in a nonlinear specification of bank lending. We demonstrate that their results imply that Japanese banks allocated lending from viable firms to unviable ones regardless of the degree of bank capitalization, being not consistent with the balance sheet cosmetics hypothesis.
International Journal of Central Banking, 2024
This paper proposes a method for identifying quantitative and qualitative monetary policy shocks ... more This paper proposes a method for identifying quantitative and qualitative monetary policy shocks in the balance sheet operations of a central bank. The method is agnostic and flexible as it relies on no assumptions on how the size and composition of the central bank’s balance sheet will respond after the bank makes a policy decision. We identify two types of policy shocks as “anticipated” shocks that best portend the current and future paths of these policy instruments in response to them. We obtain evidence that qualitative easing shocks have expansionary effects on the economy while quantitative easing shocks do not.
Mind & Society, 2023
This paper explores the psychological motivations behind collectivist behavior in Japan and the U... more This paper explores the psychological motivations behind collectivist behavior in Japan and the U.S. Using data from a large-scale questionnaire survey, we examine the causes of collectivist behavior (i.e., group conformity) at workplaces and at home. Our key findings are as follows: (i) in Japan, people conform to their groups, both at work and at home, because they consider that cooperation with others will result in greater achievement; (ii) in both Japan and the U.S., people conform to their groups, both at work and at home, because behaving similarly to others makes them feel comfortable; and (iii) in both Japan and the U.S., people conform to their family’s opinion at home because they value cooperation with family members. Our findings suggest that institutional differences between Japan and the U.S. give rise to the differences in psychological motivations for collectivist behavior.
Journal of Banking and Finance, 2020
Examining a loan-level matched sample of Japanese banks and firms, we study the factors determini... more Examining a loan-level matched sample of Japanese banks and firms, we study the factors determining the termination of bank-firm relationships. We find that such terminations are mainly driven by bank factors, and that these bank-driven terminations increase when the banks' capital conditions become worse. Furthermore, a longer duration relationship decreased the probability of termination substantially when the Japanese banking system was stable, but the duration effects weakened when the system became fragile.
TCER Working Paper Series, 2019
We examine the trends in cash usage in Japan and its substitution with noncash payment methods, s... more We examine the trends in cash usage in Japan and its substitution with noncash payment methods, such as credit cards and electronic money, using both aggregate and individual household survey data. We find that cash hoarding accounts for as much as 42% of total cash circulation in Japan. Behind this finding lies an unstable semi-log cash demand function after the late 1990s and a stable log-log cash demand function from 1995 to 2016. We also find that the extent of possible decreases in cash demand because of the substitution of cash for credit cards in day-to-day transactions is not large. Our back-of-the-envelope estimate of the possible maximum decrease in cash demand for day-to-day transactions is at most 0.4% in 2017 of the total cash in circulation in Japan.
Journal of Financial Stability, 2018
In this study we use a matched dataset of Japanese banks and firms to examine how bank-driven ter... more In this study we use a matched dataset of Japanese banks and firms to examine how bank-driven terminations of bank-borrower relationships affect the investments of the borrowers. We find that bank-driven terminations significantly decrease investment, exerting an effect that exceeds that due to credit reductions within continuing relationships. Our results also show that the unwanted effect of bank-driven terminations grows as the loan market deteriorates as a whole, which prevents firms from obtaining funding from other sources after their relationships with banks are terminated. Our findings coincide with previous literature emphasizing financial frictions in the matching process and the importance of relation-specific assets in credit markets.
Journal of Banking and Finance, 2016
Public capital injections into the banking system are a comprehensive policy program aimed at red... more Public capital injections into the banking system are a comprehensive policy program aimed at reducing the financial risks faced by capital-injected banks, thereby stimulating their lending and profitability. This paper evaluates empirically two large-scale bank capital injections in Japan in 1998 and 1999. We begin by extracting the treatment effects of the public injections using bank-level panel data. Using a difference-in-difference estimator in two-way fixed-effects regression models, we find that the public injections significantly reduced the financial risks faced by the capital-injected banks, but did not stimulate their lending and profitability. Next, we investigate the factors that impeded bank lending following the capital injections using a matched sample of Japanese banks and their borrowers. By employing three-way fixed-effects regression models corresponding to the matched sample, we provide evidence that the deterioration of borrower creditworthiness inhibited not only the capital-injected banks, but also other banks, from lending more.
Journal of the Japanese and International Economies, 2012
Using Japanese money market data, this paper compares the predictive ability of the log-log speci... more Using Japanese money market data, this paper compares the predictive ability of the log-log specification with infinite elasticity at a zero interest rate and the semilog specification with a one time switch from moderate to relatively high semielasticity at annual interest rates less than 0.5%. We find that the latter specification dominates the former in terms of predictive ability for the extremely low interest rate regime (the period between 1999 and 2006) because under the former the semielasticity is excessively sensitive to slight changes in interest rates. We find that interest rate semielasticity has remained stable at a high level since the mid-1990s.
Journal of the Japanese and International Economies, 2009
Using secondary market data on corporate bonds issued in Japan between 1997 and 2005, this paper ... more Using secondary market data on corporate bonds issued in Japan between 1997 and 2005, this paper explores the determinants of the credit spread of corporate bond rates over interest swap rates. We find that credit spreads properly reflect financial factors at the firm level, including debt-to-equity ratios, volatility, and maturity, particularly for longer-term bonds. In addition, an economy-wide factor common among bond issues unable to be captured by firm-level factors, plays an important role in determining credit spreads, and these economy-wide effects to a great extent cancel out firm-level factors for some subsample periods. We also identify possible factors responsible for the significant economy-wide effects.
Macroeconomic Dynamics, 2009
This paper explores the shape of the Japanese money demand function in relation to the historical... more This paper explores the shape of the Japanese money demand function in relation to the historical path of the Bank of Japan's policy rate by employing Saikkonen and Choi's (2004) cointegrating smooth transition model. The nonlinear model provides a unified econometric framework, not only for pursuing the time profile of interest elasticity, but also to test the linearity of the Japanese money demand function. The test results for the linearity of the Japanese money demand function provide evidence of nonlinearity with a semi-log model and linearity with a double-log model.
Hitotsubashi Journal of Economics, 2009
Based on a standard model of money demand, this paper first shows that a relationship between mon... more Based on a standard model of money demand, this paper first shows that a relationship between money supply and prices may be substantially weakened when money demand is highly interest-elastic, and then presents empirical evidence for this implication using the Japanese money market data for the sample period, 1985–1999.
The Japanese Economic Review, 2008
This paper discusses the successes and failures of Japanese monetary policy by evaluating policie... more This paper discusses the successes and failures of Japanese monetary policy by evaluating policies from January 1980 to May 2003 in the light of optimal policy rules. First, we quantitatively conceptualize the Bank of Japan (BOJ)'s policy decisions by employing Bernanke and Mihov's (1998) econometric methodology for developing monetarypolicy measures, and term the resulting policy measure the 'actual policy measure'. Next, assuming that the BOJ is committed to optimal policy rules, we simulate optimal policy paths, which we term 'optimal policy measures'. We evaluate Japanese monetary policy historically by comparing actual and optimal policy measures.
Journal of the Japanese and International Economies, 2006
This paper reexamines the operating procedures of the Bank of Japan (BOJ) and identifies the mone... more This paper reexamines the operating procedures of the Bank of Japan (BOJ) and identifies the monetary policy shock up to June 1995 by employing the structural VAR approach of Bernanke and Mihov (1998). This approach identifies exogenous components of monetary policy by setting up equilibrium models of the reserve market. In this way, it presents two equilibrium models, the Implicit Cost (IC) model and the Credit Rationing (CR) model, which are distinguished by opposing views about the BOJ's discount-window borrowing policy. The IC model has the feature that the BOJ endogenously accommodates the demand for discount-window borrowing by private banks. In contrast , the CR model has the feature that the BOJ exogenously controls the level of discount-window lending. This paper demonstrates that the CR model is superior to the IC model in describing the BOJ's operating procedures up to June 1995.
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Papers by Kiyotaka Nakashima
bank lending, using a bank-firm loan-level matched dataset from 1999 to 2015 by
extracting exogenous changes in unconventional monetary policies over the past 20
years in Japan. We find that an increase in the share of unconventional assets held by
the Bank of Japan boosts lending to firms with higher credit risks from banks with
lower liquidity ratios and higher risk appetites while an expansion of the monetary
base does not have such effects. Furthermore, we find that interest rate cuts stimulate
lending to risky firms from banks with higher leverage.
bank lending, using a bank-firm loan-level matched dataset from 1999 to 2015 by
extracting exogenous changes in unconventional monetary policies over the past 20
years in Japan. We find that an increase in the share of unconventional assets held by
the Bank of Japan boosts lending to firms with higher credit risks from banks with
lower liquidity ratios and higher risk appetites while an expansion of the monetary
base does not have such effects. Furthermore, we find that interest rate cuts stimulate
lending to risky firms from banks with higher leverage.